DIGITAL MICROWAVE CORP /DE/ - 10-K Annual Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

---------------------
FORM 10-K

(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934. FOR THE FISCAL YEAR ENDED MARCH 31, 2000.
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934. For the transition period from _______ to ______.
Commission file number 0-15895

DIGITAL MICROWAVE CORPORATION
(Exact Name of Registrant as Specified in Its Charter)

DELAWARE 77-0016028
(State of Incorporation) (I.R.S. Employer Identification No.)

170 ROSE ORCHARD WAY, SAN JOSE, CALIFORNIA 95134
(Address of Principal Executive Offices) (Zip Code)

Registrant's telephone number, including area code: (408) 943-0777

Securities registered pursuant to Section 12 (b) of the Act: NONE

Securities registered pursuant to Section 12 (g) of the Act:

COMMON STOCK-PAR VALUE $0.01 PER SHARE
(Title of class)

Indicate by check mark whether the Registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---

Indicate by a check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-K or any
amendment to this Form 10-K. / /

State the aggregate market value of the voting stock held by
non-affiliates of Registrant (based on the last reported sale price of $36.3125
per share on the Nasdaq National Market) as of June 19, 2000: Approximately
$2,635,966,000.

As of June 19, 2000, there were 73,024,339 shares of Common Stock, par
value $0.01 per share, outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

1. Portions of the Registrant's Annual Report to Stockholders for the fiscal
year ended March 31, 2000 are incorporated by reference into Parts I and II
of this Form 10-K Report. With the exception of those portions which are
incorporated by reference, the Registrant's Fiscal 2000 Annual Report is
not deemed filed as part of this Report.

2. Portions of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held on August 8, 2000 are incorporated by reference
into Part III of this Form 10-K Report.

TABLE OF CONTENTS

DIGITAL MICROWAVE CORPORATION
2000 FORM 10-K ANNUAL REPORT

PART I

Item 1 Business .................................................................................................. 3
Item 2 Properties ................................................................................................ 13
Item 3 Legal Proceedings ......................................................................................... 14
Item 4 Submission of Matters to a Vote of Security Holders ....................................................... 14

PART II

Item 5 Market for Registrant's Common Equity and Related Stockholder Matters ..................................... 15
Item 6 Selected Financial Data ................................................................................... 15
Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations ..................... 15
Item 7A Quantitative and Qualitative Disclosures About Market Risk................................................. 15
Item 8 Financial Statements and Supplementary Data ............................................................... 16
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ...................... 16

PART III

Item 10 Directors and Executive Officers of the Registrant ........................................................ 17
Item 11 Executive Compensation .................................................................................... 18
Item 12 Security Ownership of Certain Beneficial Owners and Management ............................................ 18
Item 13 Certain Relationships and Related Transactions ............................................................ 18

PART IV

Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K .......................................... 19

PAGE 2

ITEM 1. BUSINESS

THE FOLLOWING BUSINESS SECTION CONTAINS FORWARD-LOOKING STATEMENTS
WHICH INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A
RESULT OF CERTAIN FACTORS, INCLUDING THOSE SET FORTH UNDER "FACTORS THAT MAY
AFFECT FUTURE FINANCIAL RESULTS" AND ELSEWHERE IN, OR INCORPORATED BY REFERENCE
INTO, THIS FORM 10-K.

INTRODUCTION

Digital Microwave ("Digital Microwave" or the "Company") announced
in May 2000 that it intends to change its name to DMC Stratex Networks, Inc.
contingent on stockholder approval at the annual meeting to be held on August
8, 2000.

Digital Microwave Corporation designs, manufactures and markets
advanced wireless solutions for worldwide telephone network interconnection and
broadband wireless access. The Company provides its customers with a broad
product line, which contains products that operate using a variety of
transmission frequencies, ranging from 0.3 GigaHertz (GHz) to 38 GHz, and a
variety of transmission capacities, typically ranging from 64 Kilobits to OL-3
or 155 Megabits per second. The Company's broad product line allows it to market
and sell its products to service providers in many locations worldwide with
varying interconnection and access requirements. Digital Microwave designs its
products to meet the requirements of mobile communications networks and fixed
broadband access networks worldwide. The Company's products typically enable its
customers to deploy and expand their wireless infrastructure and market their
services rapidly to subscribers, so that service providers can realize a return
on their investments in frequency allocation licenses and network equipment.

The Company has sold over 163,000 radios, which have been installed in
95 countries. The Company markets its products to service providers directly, as
well as indirectly through its relationships with original equipment
manufacturer ("OEM") base station suppliers, including Lucent Technologies,
Microelectronic Technology Inc., Nokia Telecommunications, Northern Telecom,
Motorola Inc., and Siemens AG. Between April 1, 1999 and March 31, 2000, the
Company sold its products to a number of service providers, including Beijing
Telecommunication Equipment Factory in the Asia/Pacific region; Polska Telefonia
Komorkowa, Jordan Mobile Telephone Services, MTN Networks (PVT) Limited, Panafon
S.A., Sonangol S.A., Orange PCS Limited and Tele2 AB in Europe, the Middle East
and Africa; and Winstar Wireless, Teligent Inc., Telcel, Radiomovil Dipsa S.A.
and Movicom in the Americas.

On October 1, 1999, the Securities and Exchange Commission declared the
Company's registration statement on Form S-3 effective. Under the registration
statement, the Company could sell up to $100 million in debt securities, common
stock, debt warrants and common stock warrants. During Fiscal 2000 the Company
used its shelf registration statement to sell 4,797,368 shares of its common
stock and received approximately $99.8 million, net of costs of $0.2 million.
The Company currently intends to use the net proceeds for general corporate
purposes, including working capital and strategic investments and acquisitions.

INDUSTRY BACKGROUND

Worldwide demand for high performance and high capacity broadband
access, mobile voice telephony, high-speed data communications, fixed and mobile
cellular communications, video broadcast services and paging services continues
to grow. This demand continues to grow due to: (i ) requirement for internet
broadband access, (ii) changes in the regulatory environment in many countries;
(iii) the rapid establishment of telecommunications infrastructures in many
developing countries; (iv) technological advances, particularly in the wireless
telecommunications market; and (v) the deployment of private communications
networks. Given their relatively low cost and ease of deployment, wireless
solutions are attractive to broadband access providers such as competitive local
exchange carriers (CLECS), new service providers establishing competing
telecommunications services in developed countries and to telecommunications
service providers in developing countries seeking to rapidly increase the
availability and quality of telecommunications and internet access services. The
upgrade and expansion of existing networks and the deployment of new networks
are

PAGE 3

expected to continue to offer growth opportunities for wireless infrastructure
suppliers. Wireless infrastructure suppliers address the requirements of both
mobile communications networks and fixed access networks.

Cellular telephone and other wireless services have grown rapidly over
the past five years due to deregulation, increased competition, technological
advances, and increasing consumer demand for connectivity to telecommunications
services. The demand for fixed broadband access networks is rapidly increasing
due to data transmission requirements resulting from growing internet access
demand.

Wireless networks are constructed using microwave radios and other
equipment to connect cell sites, switching systems, other wireline transmission
systems and other fixed facilities. Wireless networks range in size from a
single transmission link connecting two buildings to complex networks comprised
of thousands of wireless connections. The architecture of a network is
influenced by several factors, including the available radio frequency spectrum,
coordination of frequencies with existing infrastructure, application
requirements, environmental factors and local geography. Regulatory authorities
in different jurisdictions allocate different portions of the radio frequency
spectrum for various telecommunications services. In addition, most individual
networks require radio links which operate at several frequencies and the
transmission of voice and data typically requires different transmission
capacities. Moreover, networks in different locations are constructed using
different combinations of frequencies and with different transmission
capacities. No one transmission frequency or transmission capacity predominates
in the global market.

Whether expanding existing networks or deploying new networks, service
providers must choose between constructing networks using wireline and fiber
infrastructure or wireless infrastructure. Wireline and fiber connectivity
solutions typically require significant installation periods and may be
relatively expensive to install. For cellular telephony in developed countries
where wireline infrastructure is in place, new service providers may have the
option to lease networks from traditional service providers, but may choose not
to do so because leasing arrangements must be entered into with their
competitors, may be comparatively expensive and do not allow control over the
network. In developing countries, many service providers are initially
installing wireless networks because such networks are generally faster to
install and may be less expensive than traditional wireline networks. As a
result, many service providers are deploying wireless networks as an alternative
to the construction or leasing of traditional wireline networks. For broadband
access networks the service providers can use fiber or wireless connectivity.
Similar to cellular telephone networks, wireless broadband access is typically
less expensive to install and can be installed more rapidly than a fiber
alternative.

For several applications, digital microwave transmission systems offer
numerous advantages over competing transmission technologies, including lower
cost of implementation and rapid deployment. Digital microwave systems can be
deployed in a matter of weeks and typically require lower infrastructure
investments and installation lead times than alternative transmission
technologies.

The Company believes that as a broadband access and telecommunication
requirements grow, digital microwave systems will continue to be used as
transmission links to support a variety of existing and expanding communications
networks and applications. In this regard, the Company believes that digital
microwave systems will be used to address the connection requirements of several
markets and applications, including the broadband access market, cellular
applications, private networks and wireless analog replacement applications.

THE DIGITAL MICROWAVE SOLUTION

The Company believes that the use of standard design platforms
for both hardware and software components in the development of its products
enables the Company to more rapidly introduce and commercially ship new products
and product enhancements to address changing market demands. The use of standard
design platforms, flexible architectures and components, and software
configurable features allows the Company to offer its customers high-performance
products with a high degree of flexibility and functionality. Flexible
architectures and components facilitate system scalability, allow customers to
acquire additional features at a relatively low incremental cost, reduce the
development time of new features, and facilitate the efficient customization of
the Company's products. The use of standard design platforms also enables the
Company to manufacture its products in a more cost-effective manner. The

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software features of many of the Company's product lines provide the Company's
customers with a greater degree of flexibility in installing, operating and
maintaining their networks.

As a result of the merger with MAS Technology and Innova Corporation,
Digital Microwave as well as internal research and development efforts, has
expanded its product line and has added additional engineering staff to allow it
to focus its efforts on multiple new product development programs concurrently.

THE COMPANY'S STRATEGY

The Company's strategy is to build on the strength of its current
products, which offer point-to-point solutions, and its strong customer sales,
service and support organization to improve its position as a leading provider
of integrated wireless solutions for broadband wireless access, PCS/PCN and
mobile and private networks. Key elements of Digital Microwave's strategy
include:

MAINTAIN A COMPREHENSIVE PRODUCT LINE. The Company anticipates that the
requirements of its customers will continue to evolve as the broadband access
telecommunications services markets change and expand. In this regard, since the
Company's customers often do not know the exact frequency band and capacity
needs of their networks at the time they are awarded franchises, Digital
Microwave's broad product line provides them with the flexibility to respond to
individual market needs, and to coordinate frequencies with existing
infrastructure and other significant variables. The Company believes that the
use of standard design platforms and flexible architectures for both hardware
and software components in its products enables it to quickly introduce and
commercially ship new products and product enhancements to address changing
market demands. The Company intends to continue to expand its product line in
response to the varying worldwide requirements of wireless networks.

ADDRESS WORLDWIDE MARKET OPPORTUNITIES. The Company believes that it is
well-positioned to address worldwide market opportunities for wireless
infrastructure suppliers. For example, there are substantial telecommunications
infrastructures being built for the first time in many African, Asian and Latin
American countries; telecommunications infrastructures are being expanded in
Europe; and broadband access networks are being constructed in the United
States. The Company believes that maintaining close proximity to its customers
provides it with a competitive advantage in securing orders for its products and
in servicing its customers. Local offices enable the Company to better
understand the local issues and requirements of its customers and to address its
customers' individual geographic, regulatory, and infrastructure requirements.
As a result, the Company has developed a global sales, service and support
organization, with offices in Europe, Africa, Asia, New Zealand, Australia, the
Middle East and the Americas. With its 28 sales or support offices in 23
countries, the Company can respond quickly to its customers' needs and provide
prompt on-site technical support.

LEVERAGE DISTRIBUTION CHANNELS. The Company markets its products to
service providers directly, as well as indirectly through its relationships with
OEM base station suppliers, such as Lucent Technologies, Northern Telecom,
Motorola, Inc., Nokia Telecommunications, and Siemens AG, as well as through its
relationships with system integrators and private labelers. The Company also
markets its products through independent agents and distributors in certain
countries. The Company intends to leverage upon such relationships and its
direct worldwide presence with service providers to expand its customer base and
enhance its global presence.

FOCUS ON BUSINESS EXPANSION INTO EMERGING APPLICATIONS. The Company
believes that it can leverage its core technical competencies and its global
sales, service and support organization to enter into rapidly growing
applications, including wireless local loop, data access, wireless data
transport, and alternative local telephone facilities access.

PAGE 5

EXISTING PRODUCTS

The Company's principal product families include the Altium-TM-, XP4-TM-,
DART-TM-, SPECTRUM-TM- II, DXR-TM- 700, DXR-TM- 200, DXR-TM- 100, and ProVision.

ALTIUM. Altium, which began volume shipments in January 1999, is a next
generation radio platform aimed at providing higher capacity solutions in
microwave and millimeter wave bands. From its initial shipments and through
Fiscal 2000, Altium has had the fastest product rollout than any product in the
Company's history. SONET/SDH capable, Altium can wirelessly extend or complete
SONET and SDH transport networks to complement or be an alternative to fiber
deployment. Key attributes of size, performance, flexibility and rapid
deployment bring benefits to both interconnect and access applications. Altium
operates at frequencies of 7, 8, 11, 13, 15, 18, 23, 26 and 38 GHZ and at
OC-3/STM-1 capacity at 155 Mbps. The Company is developing a product family
based on Altium with even higher capacities to meet growing customer
requirements.

XP4. The XP4 product family, which began shipping in September 1998,
is based on a common system architecture and is software configurable. XP4
products operate at frequencies of 7, 8, 13, 15, 18, 23, 26 and 38 GHz. Similar
to the SPECTRUM II product family, the XP4 provides significantly more
functionality compared to Digital Microwave's older product lines because of its
enhanced software configurability.

DART. The DART microwave radio, which began shipping in September
1998, is the latest in radio technology for low-cost, wireless transmission of
telecommunications services. The DART radio offers a single E1 or DS-1 data
stream transmission and is designed for a smaller cell site in a wireless
network, typically referred to as microcell/picocell, and last-mile access
requirements. The very compact, all-outdoor design connects directly to base
station equipment via a single twisted-pair cable, making the DART radio
extremely cost efficient to install and a viable alternative to leased line
facilities. The DART radio can also be used in the build out of wireless
internet access networks. Features of the DART microwave radio include its
compact, integrated outdoor unit, low power consumption, programmability from
laptop computers, and Simple Network Management Protocol (SNMP) compatibility.
Available frequencies range from 15 GHz to 38 GHz.

SPECTRUM II. The SPECTRUM II product family, introduced in July 1995,
offers medium capacity products ranging from T-1, or 1.5 Megabits per second
(Mbps), to DS-3, or 45 Mbps, that operate at 7, 8, 13, 15, 18, 23, 26 and 38
GHz. The SPECTRUM II product line is smaller in size, less expensive and easier
to install than Digital Microwave's previous products. In addition,
significantly more functionality is available in the SPECTRUM II product line
than earlier generation products because of its enhanced software
configurability, which provides the Company's customers with greater flexibility
and control.

DXR 700. The DXR 700 product family, began shipping in March 1999, is a
high performance radio platform that operates across a range of capacities from
2x2 Mbps to 34 Mbps, using efficient 16 and 64 Quadrature Amplitude Modulation
(QAM). A set of advanced features, including forward error correction and an
adaptive equalizer, target medium- and long-distance link requirements. Optional
errorless diversity protection switching delivers excellent performance under
the most difficult radio transmission conditions. The DXR 700 platform covers
multiple frequencies from 2 GHz to 8 GHz.

DXR 200. First shipped in 1994, the DXR 200 product line provides an
integrated, modular, linking solution for a wide variety of communications
systems in markets with low to medium capacity transmission requirements. The
DXR 200's integrated modular design allows it to support a variety of
configurations, which can incorporate multiple features in the unit to
accommodate the differing communications needs of the Company's customers,
overcome difficult radio frequency environments, accommodate multiple data
speeds and support multiple communication protocols. The DXR 200 can operate in
frequency bands from 64 kilobits per second (Kbps) to 2.7 GHz.

DXR 100. First shipped in 1996, the DXR 100 product line is designed to
address medium and long haul, trunking applications and capacities higher than
those addressed by the DXR 200. The DXR 100 supports these higher capacity
environments using spectrum efficient transmission techniques, including
Quadrature Phase Shift Keying (QPSK) or QAM modulation and low error rate
technologies, including forward error correction and adaptive

PAGE 6

equalization. The DXR 100 provides low to medium capacity links for cellular
applications, basic telephony transmission and customer access applications,
particularly in urban areas. The DXR 100 supports a variety of data rates with
high spectrum efficiencies and maintains signal reception in harsh or difficult
radio frequency environments.

PROVISION. The ProVision element manager is a centralized network
monitoring and control system for all Digital Microwave products. Based on a
UNIX-TM- system platform, the ProVision element manager can expand to manage
small systems as well as large networks. The system is particularly suitable for
management of broadband access networks. The ProVision management system is
built on open standards. It supports multiple protocols, such as SNMP, TL1 and
ASCII, and it seamlessly integrates into higher level managers through available
interfaces. The ProVision element manager is compatible with all
management-enabled Digital Microwave radios, including the Altium, SPECTRUM II,
XP4, DXR and DART radio families, as well as prior radio products.

NEW PRODUCT DEVELOPMENT

Digital Microwave intends to continue to focus significant resources on
product development to maintain its competitiveness and to support its entry
into new wireless opportunities, including wireless data transport and
alternative local telephone facilities access. Programs currently in progress,
if successfully completed, could result in new products and additions to current
product families that will have the capability to handle greater amounts of
voice and data traffic at increased cost-effectiveness.

There can be no assurance that the Company will be successful in
developing and marketing any of the products currently being developed, that the
Company will not experience difficulties that could further delay or prevent the
successful development, introduction and sale of future products, or that these
products will adequately meet the requirements of the marketplace and achieve
market acceptance. See "Research and Development."

CUSTOMERS

Digital Microwave markets its products to customers in the
telecommunications industry worldwide. The Company's customers include service
providers, which incorporate the Company's products into their
telecommunications networks to deliver services directly to consumers, and OEMs,
which provide and install integrated systems to service providers.

Although the Company has a large customer base, during any given
quarter, a small number of customers may account for a significant portion of
the Company's net sales. In certain circumstances the Company sells its products
to service providers through OEMs, which provide the service providers with
access to financing and in some instances, protection from fluctuations in
foreign currency exchange rates. During Fiscal 2000, one customer accounted for
16% (Beijing Telecommunications Factory) of net sales. No single customer
accounted for 10% or more of the Company's net sales in Fiscal 1999 or Fiscal
1998. At March 31, 2000, three customers collectively accounted for
approximately 59% of the Company's $111.9 million backlog. While management
considers the Company's relationships with each of its major customers to be
good, there can be no assurance that the Company's current customers will
continue to place orders with the Company, that orders by existing customers
will continue to be at levels of previous periods, or that the Company will be
able to obtain orders from new customers. The Company's customers typically are
not contractually obligated to purchase any quantity of products in a particular
period and product sales to major customers have varied widely from period to
period. The loss of any existing customer, a significant reduction in the level
of sales to any existing customer, or the failure of the Company to gain
additional customers could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Factors That May
Affect Future Financial Results."

SALES, MARKETING AND SERVICE

Digital Microwave believes that a direct and continuing relationship
with service providers is a competitive advantage in attracting new customers
and satisfying existing ones. As a result, the Company offers its products and
services principally through its own sales, service and support organization,
which allows the Company to closely monitor the needs of its customers. The
Company has offices in the United States, New Zealand, Australia, Canada, the
United Kingdom, Germany, United Arab Emirates, Mexico, Colombia, India, Sri
Lanka, China, Singapore, Argentina, Brazil,

PAGE 7

Greece, Malaysia, South Africa, Botswana, Thailand, and the Philippines. The
Company's local offices provide it with a better understanding of its customers'
needs and enable the Company to respond to local issues and unique local
requirements.

The Company has informal, and in some cases formal, relationships with
OEM base station suppliers. Such relationships increase the Company's ability to
pursue the limited number of major contract awards each year. In addition, such
relationships provide the Company's customers with easier access to financing
and to integrated system providers with a variety of equipment and service
capabilities. There can be no assurance that the Company will continue to be
able to maintain and develop such relationships or, that if such relationships
are developed, they will be successful. In selected countries, the Company also
markets its products through independent agents and distributors, as well as
system integrators and brand labelers.

As of March 31, 2000, the Company employed approximately 307 people in
its sales marketing, service and support organization, approximately 78% of whom
primarily support sales outside the United States. Sales personnel are highly
trained to provide the customer with assistance in selecting and configuring a
digital microwave system suitable for the customer's particular needs. The
Company's customer service and support personnel provide customers with
training, installation, service and maintenance of the Company's systems under
contract. The Company offers a twenty seven (27) month (which includes 3 months
for installation either by Digital Microwave or buyer) limited warranty for all
customers on all of the Company's products. The Company provides warranty and
post-warranty services from its manufacturing locations in the United States and
New Zealand and its service centers in the United Kingdom, the United States and
the Philippines.

RESEARCH AND DEVELOPMENT

Digital Microwave believes that its ability to enhance its current
products, develop and introduce new products on a timely basis, maintain
technological competitiveness and meet customer requirements is essential to the
Company's continued success. Accordingly, the Company allocates, and intends to
continue to allocate, a significant portion of its resources to research and
development efforts. During Fiscal 2000, the Company invested $24.4 million or
8.1% of net sales on research and development, compared to $24.1 million or
10.2% of net sales in Fiscal 1999 and $24.5 million or 7.1% of net sales in
Fiscal 1998. The Company expects its research and development spending to
increase in Fiscal 2001. As of March 31, 2000, the Company employed
approximately 193 people in its research and development organization in San
Jose, California, Seattle, Washington and Wellington, New Zealand.

The market for the Company's products is characterized by rapidly
changing technologies and evolving industry standards. Accordingly, the
Company's future performance depends on a number of factors, including its
ability to identify emerging technological trends in its target markets, to
develop and to maintain competitive products, to enhance its products by adding
innovative features that differentiate its products from those of its
competitors and to manufacture and to bring products to market quickly at
cost-effective prices. The Company believes that the use of flexible
architectures and components assists in the rapid deployment of new products and
enhancements to satisfy customer, industry and market needs. The Company
believes that to remain competitive in the future it will need to continue to
develop new products, which will require the investment of significant financial
resources in product development. There can be no assurance, however, that the
Company will successfully complete the development of any future products, that
such products will achieve market acceptance or that such products will be
capable of being manufactured at competitive prices in sufficient volumes. In
the event that such products are not developed in a timely manner, do not gain
market acceptance or are not manufacturable at competitive prices, the Company's
business, financial condition and results of operations could be harmed.

MANUFACTURING AND SUPPLIERS

Digital Microwave's manufacturing operations consist primarily of final
assembly, customer software configuration, test and quality control of materials
and components. The manufacturing process consists primarily of materials
management, extensive unit and environmental testing of components and
subassemblies at each stage of the manufacturing process, final assembly of the
terminals, and prior to shipment, quality assurance testing and inspection of

PAGE 8

all products. The Company has three manufacturing facilities, which presently
are located in San Jose, California, Wellington, New Zealand and Seattle,
Washington. The Company's manufacturing operations in San Jose, California,
Seattle, Washington and Wellington, New Zealand are certified to International
Standards Organization (ISO) 9001, a recognized international quality standard.
The manufacturing facility in Wellington, New Zealand is also certified to ISO
14001, an internationally recognized environmental quality standard. As of March
31, 2000, the Company maintained a staff of 335 manufacturing personnel.

The Company's manufacturing operations are highly dependent upon the
delivery of materials and components by outside suppliers in a timely manner. In
addition, the Company depends in part upon subcontractors to assemble major
components and subassemblies used in its products in a timely and satisfactory
manner. The Company does not generally enter into long-term or volume purchase
agreements with any of its suppliers, and no assurance can be given that such
materials, components and subsystems will be available in the quantities
required by the Company, if at all. The inability of the Company to develop
alternative sources of supply quickly and on a cost-effective basis could
materially impair the Company's ability to manufacture and deliver its products
in a timely manner. There can be no assurance that the Company will not
experience material supply problems or component or subsystem delays in the
future.

From time to time, the Company has experienced delays and other supply
problems with vendors, but such delays and other problems have not had a
significant impact on the Company's results of operations. To reduce any future
problems associated with delays, the Company has contracted for component and
subassembly parts from additional sources. The Company and its key suppliers
maintain a high level of communication at all levels of their respective
management to ensure that production requirements and constraints are taken into
account in each of their respective production plans.

BACKLOG

Digital Microwave's backlog at March 31, 2000 was $111.9 million, as
compared with $63.9 million at March 31, 1999. The Company only includes orders
scheduled for delivery within 12 months in its backlog. Product orders in the
Company's current backlog are subject to changes in delivery schedules or to
cancellation at the option of the purchaser without significant penalty.
Accordingly, although useful for scheduling production, backlog as of any
particular date may not be a reliable measure of sales for any future period
because of the timing of orders, delivery intervals, customer and product mix,
and the possibility of changes in delivery schedules and additions or
cancellations of orders.

COMPETITION

The microwave interconnection and access business is a specialized
segment of the wireless telecommunications industry and is extremely
competitive. The Company expects such competition to increase in the future.
Several established and emerging companies offer a variety of microwave, fiber
optic, and other connectivity products for applications similar to those of the
Company's products. Many of the Company's competitors have more extensive
engineering, manufacturing and marketing capabilities and substantially greater
financial, technical and personnel resources than the Company. In addition, many
of the Company's competitors have greater name recognition, a larger installed
base of products and longer-standing customer relationships. The Company
considers its primary competitors to be L.M. Ericsson, Northern Telecom, Siemens
AG, Nera, Alcatel and the Microwave Communications Division of Harris
Corporation. In addition, other existing competitors include Nokia, SIAE, Sagem
and NEC as well as several private companies currently in the startup stage.
Both Northern Telecom and Siemens AG have product lines that compete with those
of the Company, and are also OEMs through which the Company markets and sells
its products. Some of the Company's largest customers could develop the
capability to manufacture products similar to those manufactured by the Company.
Existing and potential competition in the industry has resulted in, and will
continue to result in, significant price competition. The Company believes that
competition in its markets is based primarily on price, quality, availability,
customer service and support, breadth of product line, product performance and
features, rapid delivery, reliability, timing of new product introductions by
the Company, its customers and its competitors, and the ability of its customers
to obtain financing. The Company's future success will depend upon its ability
to address the increasingly sophisticated needs of its customers by enhancing
its current products, by developing and introducing new products in a timely
manner that keep

PAGE 9

pace with technological developments and emerging wireless telecommunications
services, and by providing such products at competitive prices. There can be no
assurance that the Company will have the financial resources, technical
expertise, or marketing, sales, distribution, and customer service and support
capabilities to compete successfully. See "Factors That May Affect Future
Financial Results."

GOVERNMENT REGULATION

Radio communications are subject to regulation by United States and
foreign laws and international treaties. Digital Microwave's equipment must
conform to international requirements established to avoid interference among
users of microwave frequencies and to permit interconnection of
telecommunications equipment. The Company has complied with such rules and
regulations with respect to its existing products. Any delays in compliance with
respect to future products could delay the introduction of such products. In
addition, radio transmission is subject to regulation by foreign laws and
international treaties. Equipment to support these services can be marketed only
if permitted by suitable frequency allocations and regulations. Failure by the
regulatory authorities to allocate suitable frequency spectrum could harm the
Company's business, financial condition and results of operations.

The regulatory environment in which the Company operates is subject to
change. Regulatory changes, which are affected by political, economic and
technical factors, could significantly impact the Company's operations by
restricting development efforts by the Company and its customers, making current
systems obsolete or increasing the opportunity for additional competition. Any
such regulatory changes could harm the Company's business, financial condition
and results of operations. The Company might deem it necessary or advisable to
modify its systems to operate in compliance with such regulations. Such
modifications could be extremely expensive and time-consuming to complete.

INTELLECTUAL PROPERTY

The Company's ability to compete will depend, in part, on its ability
to obtain and enforce intellectual property protection for its technology in the
United States and internationally. The Company relies upon a combination of
trade secrets, trademarks, copyrights, patents and contractual rights to protect
its intellectual property. For example, the Company presently has four patents
and one pending patent covering its products. In addition, the Company enters
into confidentiality and invention assignment agreements with its employees, and
enters into non-disclosure agreements with its suppliers and appropriate
customers so as to limit access to and disclosure of its proprietary
information. There can be no assurance that any steps taken by the Company will
be adequate to deter misappropriation or impede independent third party
development of similar technologies. In the event that such intellectual
property arrangements are insufficient, the Company's business, financial
condition and results of operations could be harmed. Moreover, there can be no
assurance that the protection provided to the Company's intellectual property by
the laws and courts of foreign nations will be substantially similar to the
remedies available under United States law or that third parties will not assert
infringement claims against the Company.

While the Company's ability to compete may be affected by its ability
to protect its intellectual property, the Company believes that, because of the
rapid pace of technological change in the wireless telecommunications industry,
its innovative skills, technical expertise and ability to introduce new products
on a timely basis will be more important in maintaining its competitive position
than protection of its intellectual property. Trade secret, trademark, copyright
and patent protections are important but must be supported by other factors such
as the expanding knowledge, ability and experience of the Company's personnel,
new product introductions and product enhancements. Although the Company
continues to implement protective measures and intends to defend vigorously its
intellectual property rights, there can be no assurance that these measures will
be successful.

The wireless telecommunications industry is characterized by numerous
allegations of patent infringement among competitors and considerable related
litigation. Accordingly, the Company may in the future be notified that it is
infringing certain patent or other intellectual property rights of others.
Although there are no such pending lawsuits against the Company or unresolved
notices that the Company is infringing upon intellectual property rights of
others, there can be no assurance that litigation or infringement claims will
not occur in the future. Such litigation or claims could result in substantial
costs and diversion of resources and could harm the Company's business,
financial condition and

PAGE 10

results of operations. The wireless telecommunications industry is subject to
frequent litigation regarding patent and other intellectual property rights.
Certain companies and organizations in the wireless telecommunications industry
have patents that protect their intellectual property rights in these areas. In
the event of an adverse result of any such litigation, the Company could be
required to expend significant resources to develop non-infringing technology or
to obtain licenses to the technology that is the subject of the litigation.
There can be no assurance that the Company would be successful in such
development or that any such license would be available on commercially
reasonable terms.

LITIGATION

The Company may be a defendant at any time in various suits and is
subject to various claims that arise in the normal course of business. In the
opinion of management, the ultimate disposition of these proceedings will not
harm the consolidated financial position, liquidity or results of operations of
the Company.

EMPLOYEES

As of March 31, 2000, the Company employed 974 full-time and temporary
employees. None of the Company's employees is represented by a collective
bargaining agreement. The Company's future performance will depend in large
measure on its ability to attract and retain highly skilled employees.
Competition for such personnel is intense and there can be no assurance that the
Company will be successful in attracting and retaining highly skilled employees.
The Company has never experienced a work stoppage and believes its relationship
with its employees to be good.

FACTORS THAT MAY AFFECT FUTURE FINANCIAL RESULTS

The statements in the Annual Report to Stockholders and this Form 10-K
concerning the Company's future products, expenses, revenues, gross margins,
liquidity, and cash needs, as well as the Company's plans and strategies,
contain forward-looking statements concerning the Company's future operations
and financial results. These forward-looking statements are based on current
expectations, and the Company assumes no obligation to update this information.
Numerous factors could cause actual results to differ materially from those
described in these statements. In particular, the Company's results can vary due
to economic and competitive conditions, the volume and timing of product orders,
shipment volumes, product margins, the ability of the Company and its key
suppliers to respond to changes made by customers in their orders, and the
timing of new product introductions by the Company and its competitors. The
Company's results may also vary significantly depending on other factors,
including the mix of products sold; the cost and availability of components and
subsystems; relative prices of the Company's products; adoption of new
technologies and industry standards; competition; fluctuations in foreign
currency exchange rates; regulatory developments; and general economic
conditions. Furthermore, the Company's backlog may not be representative of
actual sales for any succeeding period because of the timing of orders, delivery
intervals, customer and product mix, and the possibility of changes in delivery
schedules and additions or cancellation of orders. Prospective investors and
stockholders should carefully consider the factors discussed above and set forth
below in evaluating these forward-looking statements.

The quarterly operating results of the Company can vary significantly
depending on several factors, any of which could harm the Company's business,
financial condition or results of operations. In particular, the Company's
quarterly results of operations can vary due to the volume and timing of product
orders received and delivered during the quarter, the ability of the Company and
its key suppliers to respond to changes made by customers in their orders, and
the timing of new product introductions by the Company and its competitors. The
quarterly operating results also may vary significantly depending on other
factors, including the mix of products sold, the cost and availability of
components and subsystems, relative prices of the Company's products, adoption
of new technologies and industry standards, competition, fluctuations in foreign
currency exchange rates, regulatory developments, and general economic
conditions.

Manufacturers of digital microwave telecommunications equipment are
experiencing, and are likely to continue to experience, intense price pressure,
which has resulted, and is expected to continue to result, in downward pricing
pressure on the Company's products. As a result, the Company has experienced,
and expects to continue to experience, declining average sales prices for its
products. The Company's future profitability is dependent upon its ability to
improve manufacturing efficiencies, reduce material costs of products, and to
continue to introduce new products and

PAGE 11

product enhancements. Any inability of the Company to respond to increased price
competition would harm the Company's business, financial condition and results
of operations.

The markets for the Company's products are extremely competitive, and
the Company expects that competition will increase. The Company's existing and
potential competitors include established and emerging companies, such as L.M.
Ericsson, Northern Telecom, Siemens AG, Microwave Communications Division of
Harris Corporation, Alcatel, Nokia, Nera, NEC, Sagem and SIAE, many of
which have more extensive engineering, manufacturing and marketing capabilities
and significantly greater financial, technical, and personnel resources than the
Company. The Company believes that its ability to compete successfully will
depend on a number of factors both within and outside its control, including
price, quality, availability, customer service and support, breadth of product
line, product performance and features, rapid delivery, reliability, timing of
new product introductions by the Company, its customers and its competitors, and
the ability of its customers to obtain financing. The Company continues to
experience customer demands for shorter delivery cycles. There can be no
assurance that the Company will have the financial resources, technical
expertise, or marketing, sales, distribution, and customer service and support
capabilities to compete successfully.

The Company expects that international sales will continue to account
for the majority of its net product sales for the foreseeable future. As a
result, the Company is subject to the risks of doing business internationally,
including unexpected changes in regulatory requirements; fluctuations in foreign
currency exchange rates; imposition of tariffs and other barriers and
restrictions; the burdens of complying with a variety of foreign laws; and
general economic and geopolitical conditions, including inflation and trade
relationships. There can be no assurance that currency fluctuations, changes in
the rate of inflation or any of the aforementioned factors will not harm the
Company's business, financial condition and results of operations.

The Company's manufacturing operations are highly dependent upon the
delivery of materials by outside suppliers in a timely manner. In addition, the
Company depends in part upon subcontractors to assemble major components and
subsystems used in its products in a timely and satisfactory manner. The Company
does not generally enter into long-term or volume purchase agreements with any
of its suppliers, and no assurance can be given that such materials, components
and subsystems will be available in the quantities required by the Company, if
at all. The inability of the Company to develop alternative sources of supply
quickly and on a cost-effective basis could materially impair the Company's
ability to manufacture and deliver its products in a timely manner. There can be
no assurance that the Company will not experience material supply problems or
component or subsystem delays in the future.

The Company has pursued, and will continue to pursue, growth
opportunities through internal development, minority investments and
acquisitions of complementary businesses and technologies. Acquisitions may
involve difficulties in the retention of personnel, diversion of management's
attention, unexpected legal liabilities, and tax and accounting issues. There
can be no assurance that the Company will be able to successfully identify
suitable acquisition candidates, complete acquisitions, integrate acquired
businesses into its operations, or expand into new markets. Once integrated,
acquired businesses may not achieve comparable levels of revenues,
profitability, or productivity as the existing business of the Company or
otherwise perform as expected. The Company's failure to manage its growth
effectively could harm the Company's business, financial condition and results
of operations.

Many currently installed computer systems and software products are
coded to accept only two digit entries in the date code field. As a result,
software that records only the last two digits of the calendar year may not be
able to distinguish whether "00" means 1900 or 2000. Residual Year 2000 problems
may result in miscalculations, data corruption, system failures or disruption of
operations. To date the Company has not experienced any significant Year 2000
problems in its internal technology systems or with vendors of systems the
Company believes to be critical to its business. In addition, the Company
believes that it is unlikely it will experience any significant Year 2000
problems in the future.

However, the Company's applications operate in complex network
environments and directly and indirectly interact with a number of other
hardware and software systems. The Company cannot predict whether Year 2000
unknown errors or defects that affect the operation of software and systems that
it uses in operating its businesses will arise in the future. If residual Year
2000 problems cause the failure of any of the technology, software or systems
necessary to operate its business, the Company could lose customers, suffer
significant disruptions in its business, lose revenues and incur substantial
liabilities and expenses. The Company could also become involved in costly
litigation

PAGE 12

resulting from Year 2000 problems. This could seriously harm the Company's
business, financial condition and results of operations.

The Company spent approximately $0.8 million investigating and
remedying issues related to Year 2000 readiness involving internal operations,
including purchases of software test tools, software upgrades, and upgrading a
security system related to Year 2000 readiness. In addition, the Company
estimates that $0.5 million of internal personnel costs were incurred to support
the Company's Year 2000 readiness plan.

In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133 ("SFAS No. 133"), "Accounting for Derivative Instruments and
Hedging Activities". SFAS No. 133 is effective for companies with fiscal years
beginning after June 15, 2000, and requires the Company to recognize all
derivatives on the balance sheet at fair value. Derivatives that are not hedges
must be adjusted to fair value through income. If the derivative is a hedge,
depending on the nature of the hedge, changes in the fair value of derivatives
will either be offset against the change in fair value of the hedged assets,
liabilities or firm commitments through earnings, or recognized in other
comprehensive income until the hedged item is recognized in earnings. The
Company believes that the adoption of this new pronouncement will not have a
material effect on the Company's financial statements.

In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." SAB 101 provides guidance on applying generally accepted accounting
principles to revenue recognition issues in financial statements. We will adopt
SAB 101 as required in the first quarter of 2001 and are evaluating the effect
that such adoption may have on our consolidated results of operations and
financial position.

During any given quarter, a small number of customers may account for a
significant portion of the Company's net sales. The Company's customers
typically are not contractually obligated to purchase any quantity of products
in any particular period, and product sales to major customers have varied
widely from period to period. The loss of any existing customer, a significant
reduction in the level of sales to any existing customer, or the failure of the
Company to gain additional customers could harm the Company's business,
financial condition and results of operations.

ITEM 2. PROPERTIES

The Company's corporate offices and principal research, development and
manufacturing facilities are located in San Jose, California in three leased
buildings aggregating approximately 132,000 square feet. The Company also leases
two buildings in Milpitas, California totaling 55,000 square feet and is used
for administration and warehousing. The Company's Seattle, Washington facilities
consist of three leased buildings aggregating approximately 79,000 square feet
of office and manufacturing space.

The Company also owns a 44,000 square foot service and repair facility
in Hamilton, Scotland and leases 10,000 square feet in Coventry, England. The
Company owns 7,000 square feet of office space and leases an additional 28,000
square feet of office and manufacturing space in Wellington, New Zealand.
Additionally, the Company also leases an aggregate of approximately 50,000
square feet world wide for sales, customer service and support offices. The
Company believes these facilities are adequate to meet its anticipated needs for
the foreseeable future.

PAGE 13

ITEM 3. LEGAL PROCEEDINGS

See "Business -- Litigation" under Item 1 of this Form 10-K and Note 4
of "Notes to Consolidated Financial Statements" incorporated herein by reference
from the Company's 2000 Annual Report to Stockholders.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

NONE.

PAGE 14

PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS

The section labeled "Stock Information" appearing on page 39 of the
Company's 2000 Annual Report to Stockholders is incorporated herein by
reference.

ITEM 6. SELECTED FINANCIAL DATA

The section labeled "Selected Consolidated Financial Data" appearing on
page 21 of the Company's 2000 Annual Report to Stockholders is incorporated
herein by reference.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The information appearing under the caption "Management's Discussion
and Analysis of Financial Condition and Results of Operations" on pages 15
through 21 of the Company's 2000 Annual Report to Stockholders is incorporated
herein by reference.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk:

The Company's exposure to market risk for changes in interest rates
relates primarily to the Company's investment portfolio. The Company does not
use derivative financial instruments in its investment portfolio. The Company
invests in high-credit quality issuers and, by policy, limits the amount of
credit exposure to any one issuer and country. The portfolio includes only
marketable securities with active secondary or resale markets to ensure
portfolio liquidity. The portfolio is also diversified by tenor to ensure that
funds are readily available as needed to meet the liquidity needs of the
Company. This policy minimizes the requirement to sell securities in order to
meet liquidity needs and therefore the potential effect of changing market rates
on the value of securities sold.

The table below presents principal amounts and related weighted average
interest rates by year of maturity for the Company's investment portfolio.

Years Ended March 31
---------------------------------------------------------------------
(In thousands) 2001 2002 2003 2004 2005
---- ---- ---- ---- ----

Cash equivalents and short-term investments $111,711 - - - -
Weighted average interest rate 6.06% - - - -

Foreign Currency Exchange Risk:

The Company transacts business in various foreign countries. During
fiscal 1999 and 2000, the Company employed a foreign currency hedging program
utilizing foreign currency forward exchange contracts to hedge certain balance
sheet and backlog transactions in non-functional currency transactions. Under
this program, increases or decreases in the Company's foreign currency
transactions when translated to the functional currency are partially offset by
realized gains and losses on the hedging instruments. The goal of this program
is to minimize net fluctuations in the value of these currencies which may cause
short-term earnings volatility. As of March 31, 2000, the Company's foreign
currency forward exchange contracts were comprised primarily of New Zealand
dollars, British Pounds and European Monetary Units and totaled the US dollar
equivalent of $ 45.8 million.

PAGE 15

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The consolidated financial statements and supplementary data, and
related notes and Report of Independent Public Accountants appearing on pages 22
through 38 of the Company's 2000 Annual Report to Stockholders are incorporated
herein by reference.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

None.

PAGE 16

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The current executive officers of Digital Microwave are as follows:

NAME AGE POSITION
------ ----- ----------

Sam Smookler 60 Chief Executive Officer and President
Frank Carretta, Jr. 55 Senior Vice President, Worldwide Sales
Carl A. Thomsen 55 Senior Vice President, Chief Financial Officer and Secretary
John C. Brandt 43 Vice President and Corporate Controller
Carol A. Goudey 52 Corporate Treasurer and Assistant Secretary
Paul A. Kennard 49 Chief Technical Officer
John P. O'Neil 62 Vice President, Personnel

Mr. Sam Smookler was appointed Chief Executive Officer and as director
in May 2000. Mr. Smookler joined the Company as President and Chief Operating
Officer in January 1998. In October 1998, at the time of the merger with Innova
Corporation, he became President, Broadband, Long Haul and Services. Prior to
joining the Company, he served as President and Chief Operating Officer of
Signal Technology Corporation, a manufacturer of electronic components and
subsystems, from September 1997 to January 1998 and as President of East Coast
Operations from February 1997 to September 1997. Prior to such time he served as
Vice President and General Manager of the Interconnection Products Division of
Augat Corporation, a manufacturer of telecommunications connection products,
from November 1994 to February 1997. From February 1992 to October 1994, he
served as General Manager of a division of M/A-COM.

Mr. Frank Carretta, Jr. joined the Company as Vice President, Worldwide
Sales and Service in October 1995 and was appointed Senior Vice President,
Worldwide Sales, Service and Marketing in November 1996. Prior to joining
Digital Microwave, Mr. Carretta served as Area Sales Director of M/A-COM from
July 1992 to September 1995.

Mr. Carl A. Thomsen joined the Company as Vice President, Chief
Financial Officer and Secretary in February 1995. In April 1999, he was
appointed Senior Vice President. Prior to joining the Company, he was Senior
Vice President and Chief Financial Officer of Measurex Corporation, a
manufacturer of sensor based process control systems.

Mr. John C. Brandt joined the Company as Controller in June 1997 and
was appointed Vice President in April 1999. Prior to joining the Company, Mr.
Brandt was employed with Honeywell-Measurex, a manufacturer of control systems,
from 1981 to June 1997, where he served in a variety of financial positions
including Operations Controller from 1988 to June 1997.

Ms. Carol A. Goudey joined the Company as Treasurer in April 1996 and
was additionally appointed Assistant Secretary in May 1996. Prior to joining
Digital Microwave, she served as Acting Treasurer of California Micro Devices
Corporation, a manufacturer of semiconductor devices, since 1994.

PAGE 17

Mr. Paul Kennard joined the Company as Vice President, Engineering in
April 1996. He was appointed Chief Technical Officer and Vice President,
Corporate Marketing in October 1998. From 1989 to March 1996, Mr. Kennard was
with California Microwave Corporation, a satellite and wireless communications
company, serving as Director of the Signal Processing Technology Department
until his promotion in 1994 to Vice President of Engineering, and then to Senior
Vice President of Engineering in 1995 for the Microwave Network Systems
Division.

Mr. John O'Neil joined the Company as Vice President, Personnel in May
1993. Mr. O'Neil was Vice President of Personnel and Administration of BEI
Electronics, Inc., a defense electronics firm, from January 1989 to April 1993.

Information concerning directors and executive officers under the
caption "Election of Directors," "Board Meetings and Committees," "Security
Ownership of Certain Beneficial Owners and Management" and "Compliance with
Section 16(a) of the Securities Exchange Act of 1934" in the Company's Proxy
Statement for the Annual Meeting of Stockholders to be held on August 8, 2000
(the "Proxy Statement"), is incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION

The information included in the Company's Proxy Statement under the
captions "Compensation of Directors," "Executive Compensation and Other
Information," "Stock Options," "Option Exercises and Holdings," "Compensation
Committee Interlocks and Insider Participation" and "Employment and Termination
Arrangements" is incorporated by reference herein.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information included in the Company's Proxy Statement under the
captions "Security Ownership of Certain Beneficial Owners and Management" and
"Employment and Termination Arrangements" is incorporated by reference herein.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

See "Business -- Manufacturing and Suppliers" under Item 1 of this Form
10-K and Note 3 of "Notes to Consolidated Financial Statements" of the Company's
2000 Annual Report to Stockholders incorporated herein by reference.

PAGE 18

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a) 1. FINANCIAL STATEMENTS

The following consolidated financial statements are contained
in the Company's 2000 Annual Report to Stockholders and are
incorporated herein by reference pursuant to Item 8:

1. Consolidated Balance Sheets as of March 31,
2000 and 1999.

2. Consolidated Statements of Operations for
each of the three years in the period ended
March 31, 2000.

3. Consolidated Statements of Stockholders'
Equity for each of the three years in the
period ended March 31, 2000.

4. Consolidated Statements of Cash Flows for
each of the three years in the period ended
March 31, 2000.

5. Notes to Consolidated Financial Statements.

6. Report of Independent Public Accountants.

2. FINANCIAL STATEMENT SCHEDULES

The following consolidated financial statement schedule for
each of the three years in the period ended March 31, 2000 is
submitted herewith:

II Valuation and Qualifying Accounts and
Reserves.

Schedules not listed above have been omitted because they are
not applicable or required, or information required to be set
forth therein is included in the Consolidated Financial
Statements, including the Notes thereto, incorporated herein
by reference.

3. EXHIBITS

The Exhibit Index begins on Page 24 hereof.

(b)

(1) On March 8, 2000 the Company filed a Current Report on Form
8-K dated March 8, 2000 disclosing that the Company had
entered into an underwriting agreement with Dain Rauscher
Wessels, a division of Dain Rauscher Incorporated, in
connection with a public offering of 1,347,368 shares of
common stock.

(2) On March 14, 2000 the Company filed a Current Report on Form
8-K dated March 14, 2000 disclosing that the Company had
consummated the sale and issuance of 1,347,368 of common stock
in a public offering.

(c) See Item 14 (a) 3 above.

(d) See Item 14 (a) 2 above.

PAGE 19

SIGNATURES

Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.

Date: June 28, 2000.

DIGITAL MICROWAVE CORPORATION

BY: /s/ Sam Smookler
-------------------------
Sam Smookler
CHIEF EXECUTIVE OFFICER

PAGE 20

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS:

That the undersigned officers and directors of Digital Microwave
Corporation do hereby constitute and appoint Sam Smookler and Carl A. Thomsen,
and each of them, the lawful attorney and agent or attorneys and agents with
power and authority to do any and all acts and things and to execute any and all
instruments which said attorneys and agents, or either of them, determine may be
necessary or advisable or required to enable Digital Microwave Corporation to
comply with the Securities and Exchange Act of 1934, as amended, and any rules
or regulations or requirements of the Securities and Exchange Commission in
connection with this Form 10-K Report. Without limiting the generality of the
foregoing power and authority, the powers include the power and authority to
sign the names of the undersigned officers and directors in the capacities
indicated below to this Form 10-K report or amendment or supplements thereto,
and each of the undersigned hereby ratifies and confirms all that said attorneys
and agents or either of them, shall do or cause to be done by virtue hereof.
This Power of Attorney may be signed in several counterparts.

IN WITNESS WHEREOF, each of the undersigned has executed this Power of Attorney
as of the date indicated opposite his name.

Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.

SIGNATURES SIGNING CAPACITY DATE
- ---------- ---------------- ----

/s/ Sam Smookler Chief Executive Officer June 28, 2000
-----------------------------------
Sam Smookler

/s/ Carl A. Thomsen Senior Vice President, Chief Financial Officer June 28, 2000
----------------------------------- & Secretary
Carl A. Thomsen (Principal Financial and Accounting Officer)

/s/ Charles D. Kissner Chairman of the Board June 28, 2000
-----------------------------------
Charles D. Kissner

/s/ Richard C. Alberding Director June 28, 2000
-----------------------------------
Richard C. Alberding

/s/ Paul S. Bachow Director June 28, 2000
-----------------------------------
Paul S. Bachow

/s/ John W. Combs Director June 28, 2000
-----------------------------------
John W. Combs

/s/ James D. Meindl Director June 28, 2000
-----------------------------------
James D. Meindl

/s/ V. Frank Mendicino Director June 28, 2000
-----------------------------------
V. Frank Mendicino

Director June , 2000
-----------------------------------
Howard Oringer

PAGE 21

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE

To Digital Microwave Corporation:

We have audited in accordance with auditing standards generally
accepted in the United States, the consolidated financial statements included
in Digital Microwave Corporation's Annual Report incorporated by reference in
this Form 10-K, and have issued our report thereon dated April 21, 2000. Our
audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The schedule listed in
item 14a(2) is the responsibility of the Company's management and is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic consolidated financial
statements. This schedule has been subjected to the auditing procedures
applied in the audits of the basic consolidated financial statements and, in
our opinion, fairly states in all material respects the consolidated
financial data required to be set forth therein in relation to the basic
consolidated financial statements taken as a whole.

/s/ ARTHUR ANDERSEN LLP

San Jose, California
April 21, 2000

PAGE 22

SCHEDULE II

DIGITAL MICROWAVE CORPORATION
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES

(IN THOUSANDS)
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT CHARGED TO BALANCE
BEGINNING OF COSTS AND AT END
DESCRIPTION YEAR EXPENSES UTILIZED OF YEAR
- -----------------------------------------------------------------------------------------------------------------------------------

Year Ended March 31, 2000

Merger and
Restructuring accrual:
Severance costs $ 900 - $ 400 $ 500
Facility termination costs 2,300 - 2,300 -
Asset write-down 800 - 400 400
-----------------------------------------------------------------------------
$ 4,000 $ - $ 3,100(A) $900
(A) Approximately $3,100 consists of cash
outflow.

Year Ended March 31, 1999

Merger and
Restructuring accrual:
Innova merger costs - $2,700 $ 2,700 $ -
Severance costs - 4,200 3,300 900
Facility termination costs - 4,100 1,800 2,300
Asset write-down - 5,800 5,000 800
Goodwill - 13,100 13,100 -
-----------------------------------------------------------------------------
- $29,900(B) $25,900(C) $4,000

(B) Approximately $12,200 consists of cash outflow.
(C) Approximately $8,200 consists of cash outflow.

(IN THOUSANDS)
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT CHARGED TO BALANCE
BEGINNING OF COSTS AND DEDUCTIONS/ AT END
DESCRIPTION YEAR EXPENSES WRITE-OFF OF YEAR
- -----------------------------------------------------------------------------------------------------------------------------------

Year Ended March 31, 2000
Allowance for
doubtful accounts $ 3,261 $ 853 $ 538(A) $ 4,652
Year Ended March 31, 1999

Allowance for
doubtful accounts $ 3,999 $ 4,608 $ (5,346) $ 3,261

Year Ended March 31, 1998

Allowance for
doubtful accounts $ 3,377 $ 356 $ 266(A) $ 3,999

(A) Net of transfers from other reserve accounts.

PAGE 23

EXHIBIT INDEX

EXHIBIT
NUMBER DESCRIPTION

2.1 Agreement and Plan of Reorganization and Amalgamation, dated December
22, 1997, among the Company, South Amalgamation Sub Ltd. and MAS
(incorporated by reference to Exhibit 2.1 to the Company's
Registration Statement on Form S-4 (File No. 333-45053)).

2.2 Agreement and Plan of Reorganization and Merger, dated as of July 22,
1998, by and among Digital Microwave Corporation, Iguana Merger Corp.
and Innova Corporation (incorporated by reference to Exhibit 2.1 to
the Company's Registration Statement on Form S-4 (File No.
333-62673)).

3.1 Restated Certificate of Incorporation, dated April 10, 1987, as
amended on November 6, 1997 and March 24, 1998, with Certificate
of Designations of Series A Junior Participating Preferred Stock
dated November 1, 1991 (incorporated by reference to Exhibit 3.1 to
the Company's Annual Report on Form 10-K for the year ended March 31,
1998).

3.2 Amended and Restated Bylaws, dated as of May 9, 2000.

4.1 Form of Common Stock Certificate (incorporated by reference to
Exhibit 4.1 to the Company's Annual Report on Form 10-K for the year
ended March 31, 1988).

4.2 Amended and Restated Rights Agreement dated as of November 3, 1998
between the Company and ChaseMellon Shareholder Services, L.L.C.,
including the form of the Certificate of Designations for the Series
A Junior Participating Stock (incorporated by reference to Exhibit
4.1 to the Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1998.

10.1 Digital Microwave Corporation 1984 Stock Option Plan, as amended and
restated on June 11, 1991. (incorporated by reference to Exhibit 10.1
to the Company's Annual Report on Form 10-K for the year ended March
31, 1991).

10.2 Form of Installment Incentive Stock Option Agreement (incorporated by
reference to Exhibit 28.2 to the Company's Registration Statement on
Form S-8 (File No. 33-43155)).

10.3 Form of installment Non-qualified Stock Option Agreement
(incorporated by reference to Exhibit 28.3 to the Company's
Registration Statement on Form S-8 (File No. 33-43155)).

10.4 Lease of premises located at 170 Rose Orchard Way, San Jose,
California (incorporated by reference to Exhibit 10.5 to the
Company's Annual Report on Form 10-K for the year ended March 31,
1991).

10.5 Lease of premises located at 130 Rose Orchard Way, San Jose,
California. (incorporated by reference to Exhibit 10.6 to the
Company's Annual Report on Form 10-K for the year ended March 31,
1991).

10.6 Form of Indemnification Agreement between the Company and its
directors and certain officers (incorporated by reference to Exhibit
10.16 to the Company's Registration Statement on Form S-1 (File No.
33-13431)).

10.7 Digital Microwave Corporation 1994 Stock Incentive Plan, as amended
and restated (incorporated by reference to the Company's Proxy
Statement for the Annual Meeting of Stockholders to be held on August
4, 1998).

10.8 Lease, dated April 5, 1995, by and between Metropolitan Life
Insurance Company and Digital Microwave Corporation, relating to 180
Rose Orchard Way, San Jose, California (incorporated by reference to
Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997)

PAGE 24

10.9 Purchase Agreement by and between the Company and Microelectronics
Technology, Inc., dated as of January 15, 1998 (incorporated by
reference to Exhibit 10.1 to the Company's Quarterly Report on Form
10-Q for the quarter ended December 31, 1998).

10.10 Purchase Agreement by and between the Company and REMEC Inc., dated
as of January 15, 1998 (incorporated by reference to Exhibit 10.2 to
the Company's Quarterly Report on Form 10-Q for the quarter ended
December 31, 1998).

10.11 Business Agreement by and between the Company and MTI, dated as of
January 26, 1998 (incorporated by reference to Exhibit 10.3 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
December 31, 1998).

10.12 Digital Microwave Corporation 1998 Non-Officer Employee Stock Option
Plan (incorporated by reference to Exhibit 99.1 to the Company's
Registration Statement on Form S-8 (File No. 333-48535)).

10.13 Product Purchase Agreement dated as of June 1, 1998, by and between
Digital Microwave Corporation and Solectron Corporation (incorporated
by reference to Exhibit 10.1 to the Company's Quarterly Report of
Form 10-Q for the quarter ended June 30, 1998.

10.14 Product Purchase Agreement, dated as of July 30, 1998, by and between
Digital Microwave Corporation and REMEC Inc. (incorporated by
reference to Exhibit 10.1 to the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 1998).

10.15 Restated Employment Agreement, dated as of August 3, 1998, by and
between Digital Microwave Corporation and Charles D. Kissner
(incorporated by reference to Exhibit 10.2 to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1998).

10.16 Employment Agreement dated as of October 8, 1998 between the Company
and Jean-Francois Grenon (incorporated by reference to Exhibit 10.5
to the Company's Quarterly Report on Form 10-Q for the quarter ended
December 31, 1998).

10.17 Digital Microwave Corporation 1999 Non-Officer Employee Restricted
Stock Purchase Plan (incorporated by reference to Exhibit 99.1 to the
Company's Registration Statement on Form S-8 (File No. 333-76233)).

10.18 Digital Microwave Corporation 1999 Employee Stock Purchase Plan
(incorporated by reference to Exhibit 99.1 to the Company's
Registration Statement on Form S-8 (File No. 333-80281)).

10.19 Form of Employment Agreement between the Company and Frank Carretta,
Jr., Paul A. Kennard, Sam Smookler and Carl A. Thomsen
(Incorporated by reference to Exhibit 10.33 to the Company's Annual
Report on Form 10-K for the year ended March 31, 1999).

10.20 Form of Employment Agreement between John C. Brandt, Carol A. Goudey
and John P. O'Neil (Incorporated by reference to Exhibit 10.34 to
the Company's Annual Report on Form 10-K for the year ended March 31,
1999.

10.21 Amendment of lease of premises located at 130 Rose Orchard Way, San
Jose California dated February 16, 2000.

10.22 Amendment of lease of premises located at 170 Rose Orchard Way, San
Jose California dated February 16, 2000.

10.23 Amendment of lease of premises located at 180 Rose Orchard Way, San
Jose California dated February 16, 2000.

10.24 Lease, dated February 16, 2000, by and between Corporate Technology
Centre Associates II LLC and Digital Microwave Corporation, relating
to 130 Rose Orchard Way, San Jose, California.

PAGE 25

10.25 Lease, dated February 16, 2000, by and between Corporate Technology
Centre Associates II LLC and Digital Microwave Corporation, relating
to 170 Rose Orchard Way, San Jose, California.

10.26 Lease, dated February 16, 2000, by and between Corporate Technology
Centre Associates II LLC and Digital Microwave Corporation, relating
to 180 Rose Orchard Way, San Jose, California.

13.1 Portions of 2000 Annual Report to Stockholders incorporated herein by
reference.

21.1 List of subsidiaries.

23.1 Consent of Independent Public Accountants

24.1 Power of Attorney (included on page 20 of this Annual Report on Form
10-K).

27.1 Financial Data Schedule for the fiscal year ended March 31, 2000.

PAGE 26